Arusha, Tanzania, 29th May 2024 – Speaking at the East Africa Business Council (EABC) –PwC webinar on Pre-Budget 2024/25, focusing on the convergence and divergence of tax proposals across the East African Community (EAC), Mr. John Bosco Kalisa, EABC Executive Director has urged Governments to fast track harmonization of EAC macro-economic goals and domestic taxes to improve the business predictability, boost intra-EAC trade and investment. Watch webinar.
Tanzania, Kenya, and Uganda share a common corporate tax rate of 30%, while Rwanda offers a marginally lower rate at 28%. This slight difference might influence multinational corporations’ decisions when considering regional headquarters or large investments.
On withholding taxes Tanzania and Uganda offer simpler structures with a flat rate or a tiered system up to 20% while Rwanda’s at 5% and 15%.
Mr. Adrian Njau EACB Trade and Policy Advisor, said “Tanzania and Kenya offer lower rates for service/management fees for residents (5%) and non-residents (15%). Uganda’s rates are 6% for residents and 15% for non-residents. Kenya’s rates are 5% for residents and 20% for non-residents. Rwanda has a flat rate of 15%.” This is not aligned with the EAC Freedom of Free Movement of Services, as service providers offering cross-border services are treated as non-residents, hence they need to account for different withholding tax rates when pricing their services, impacting intra trade of services and competiveness.
In terms of VAT on local goods and services, Tanzania has a variable rate of 18% on most items, with a reduced rate of 15% on certain essential goods. Uganda and Rwanda both maintain a standard rate of 18%, while Kenya has a slightly lower rate of 16%.
Excise duties on services is complex in EAC, Tanzania, Uganda, and Kenya have several rates for various services. For example, in Tanzania, telcos and payment service providers are subject to a 17% rate, while money transfer services are taxed at 10%. In Uganda, telcos face a 15% rate, while pay-to-view television services are taxed at 5%. Kenya applies a 15% rate to telecommunication services and a 20% rate to certain financial institution fees and charges. Excise duties on services in Rwanda are generally set at 15%, except for telecommunications services, which are taxed at 10%.
Stakeholders called for alignment with the budgetary cycle in EAC partner States to allow timely engagement for the private sector to effectively advocate for fiscal proposals to improve the trade and investment environment.
According to PwC experts, the private sector’s proposals to Tanzania’s budget include streamlining tax administration processes, such as clarifying dispute resolution procedures, expediting VAT refunds, and aligning objection admission timelines. Notably, there’s a call for tax reforms to support small and medium enterprises (SMEs), including a reduction in the Corporate Income Tax (CIT) rate to 25% and exempting SMEs from the Skills Development Levy (SDL). Additionally, proposals advocate for progressive reductions in social security contributions over five years and exempting certain items from Value Added Tax (VAT) to spur environmental conservation. Moreover, there’s a push to modernize the Excise Duty Act, with quick wins like reducing excise duty rates on telecommunications services and clarifying VAT thresholds for digital services. These proposals reflect a concerted effort to stimulate investment, foster entrepreneurship, and improve the competitiveness of Tanzanian businesses.
The proposals outlined in Kenya’s Finance Bill 2024 have the following implications for cross-border trade: The replacement of the Digital Service Tax with a 6% significant economic presence tax could increase costs for foreign digital service providers. The introduction of a motor vehicle tax and removal of certain tax exemptions may raise operational costs for foreign investors and businesses involved in infrastructure and green bond projects. Changes in the definition of royalty to include software-related fees will increase the withholding tax burden for international software companies. VAT changes, such as the increase in the mandatory registration threshold and new VAT exemptions, could streamline operations for some businesses but complicate tax compliance for others. The imposition of VAT on various financial services may lead to higher costs for cross-border financial transactions. Harmonizing excise duty rates and imposing excise duty on digital services offered by non-residents could make the Kenyan market less competitive for international service providers. However, the removal of excise duty on products imported from EAC partner states and exemptions for certain raw materials and machinery will likely facilitate regional trade and reduce costs for specific industries.
For the Uganda Financial Bill of 2024, measures include: The waiver of penalties and interest for outstanding taxes encourages compliance, potentially attracting foreign investments by reducing the tax burden on businesses. The introduction of capital gains tax on non-business asset disposals and withholding taxes on interest payments and commissions might increase costs. Replacing “branch” with “permanent establishment” aligns with international standards, simplifying compliance for multinational enterprises. Exemptions for private equity, venture capital funds, and strategic investments in electric vehicles and specialized hospitals can attract foreign direct investment in these sectors. Removing stamp duty on nominal share capital for private equity and offering NIL stamp duty for electric vehicle manufacturers further incentivize green technology investments. VAT changes, such as the obligation on auction proceeds and treating employee benefits as taxable, add compliance complexities. Increasing the VAT refund threshold improves cash flow for businesses involved in large transactions. Higher excise duties on fuel and new excise duties on materials and services could increase costs, impacting cross-border trade logistics and manufacturing. Exemptions for construction materials for electric vehicle manufacturers promote sustainable infrastructure investments, potentially attracting foreign manufacturers.
The recent tax developments and proposed changes in Rwanda’s Financial Bill include: The reduction in the Corporate Income Tax (CIT) rate from 30% to 28% will decrease tax burdens for companies, potentially freeing up more capital for investment or expansion. The proposal also includes introduction of new taxes on digital supplies and the phasing out of current tax incentives provided in the Investment Law. Introduction of a Minimum Alternative Tax and immediate expensing of capital investments. The exemption from excise duty on electric vehicles and the zero-rating of VAT on the construction of residential houses may incentivize investment in sustainable technologies and real estate development, respectively. The increase in excise duties on older vehicles aims to encourage the upgrade of Rwanda’s vehicle manufacturing.
The webinar brought together over 150 key stakeholders, including representatives from the EAC Partner States who discussed harmonizing taxation and monetary measures within the region. Kenya, Rwanda, Uganda and Tanzania have aligned their budget announcements, Burundi and South Sudan are yet to synchronize their fiscal years, and new EAC members, the Democratic Republic of the Congo and Somalia, have not commenced implementing EAC commitments.
Traditionally, EAC Ministers of Finance and Economic Planning hold Pre-Budget Consultations to agree on various tax measures before jointly unveiling their national budgets. These consultations are a milestone in harmonizing the tax regime across the EAC, which has not yet been fully realized, especially regarding domestic taxes like Value Added Tax (VAT), Excise Duty, and Income Tax.
The EABC webinar highlighted the implications of the convergences and divergences in tax proposals for the private sector and the EAC economy. The webinar was an essential platform for the private sector to gain insights into the upcoming fiscal measures and prepare for the financial year 2024/25. The EABC PwC Webinar discussed the importance of harmonizing the domestic tax regime to facilitate intra-EAC trade and investment and reduce tax disparities.
